intuitive surgical oct 2013 maude update final

8/13/2019 Intuitive Surgical Oct 2013 Maude Update Final

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Citron Follow Up on Intuitive Surgical October 3, 2013 Page 1 of 9

October 3, 2013

Citron Updates Intuitive Surgical Price Target to $200

You cant solve a problem with the same mind that created it.

-- Albert Einstein

A woman on vacation takes a walk on the beach, recovering from a recent hysterectomy. All

of a sudden, her colon falls out of her vagina down to her kneesbut think on the bright side,

the procedure helped meet the Clinical Sales Reps quarterly quota!http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfmaude/Detail.CFM?MDRFOI__ID=3305519

As much as this report is about a publicly traded company, it is about the conflict between

the practice of medicine and the profit motive. Our government is currently shut down over

a debate about healthcare. It is widely known that our per capita healthcare costs are the

highest in the worldin fact2.5 times the costs of wealthy European countries,consuming

17.6% of our GDP. However, our health outcomes are mediocre by all quality measures

compared to many European countries.

In over 12 years of publishing probative stock research, Citron is most proud of the work we

published on Intuitive Surgical (NASDAQ:ISRG) starting last December. Not because the stock

suffered a decline of over 30% amidst a record-setting bull market, but rather because we

helped raise to the forefront of public awareness the undisclosed dangers of robotic surgeryand the subsequent dilemma: what happens when medical best practices collide with

unbridled thirst for profits. At the time, we suggested a stock price of $250prompting even

Goldman Sachs to weigh in, claiming that Citron was overstating concerns.
http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfmaude/Detail.CFM?MDRFOI__ID=3305519http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfmaude/Detail.CFM?MDRFOI__ID=3305519http://www.pbs.org/newshour/rundown/2012/10/health-costs-how-the-us-compares-with-other-countries.htmlhttp://www.pbs.org/newshour/rundown/2012/10/health-costs-how-the-us-compares-with-other-countries.htmlhttp://www.pbs.org/newshour/rundown/2012/10/health-costs-how-the-us-compares-with-other-countries.htmlhttp://www.pbs.org/newshour/rundown/2012/10/health-costs-how-the-us-compares-with-other-countries.htmlhttp://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfmaude/Detail.CFM?MDRFOI__ID=3305519


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Since then, the issues at Intuitive have only intensified, but the company shows no signs of

acknowledging them yet. To preserve their long-term future, they unavoidably must confront

making the difficult strategic decisions to serve the medical community in alignment with the

best practices of medicine, rather than manipulate it for short-term profits. Citron now

believes that a generous valuation of Intuitive would be at 1214x 2014

earnings, or around $200 per share. And this is being overly generous to a

company we can genuinely argue is not investable til it gets its house in order.

In the ensuing nine months since the initial Citron reports,the company has received FDA

warning letters, criticism from numerous medical associations, and confessed a large earnings

miss. With analysts clamoring for the company to Do something about the negative press

as though that is the illness, rather than just a symptom, its understandable that investors are

left to wonder: Is the bad news behind us?With this piece, Citron affirmatively shows why

the answer is a definite NO!

Citron did not plan on revisiting this story but what we found will shock you.

Massive Increase in MAUDE Reports Submitted in 2013

In its groundbreaking report January 17, 2013, Citron took the unprecedented step of

publishing the FDAs entire MAUDE database for Intuitive Surgical, spanning 12 years of adverse

event reporting on the da Vinci. This represents the only public source of information on

adverse events for da Vinci on patients in the U.S. EvenCNBC tipped its hat to Citronin its

March 19 coverage of the name. CitronsMaude database download is now being used by

robotic surgery committees in hospitals nationwide as a crosscheck for concerns about the

device.

But something scary happened this year:

In the first 8 months of 2013, 2332Adverse Event records were postedcompare to 4603

records posted in the entire 12 year period since the first Adverse Event tracking for da Vinci

appeared in MAUDE in 2000.

Number of Adverse

Events Reported

Link to Excel format

of MAUDE databaseJan 2013August

20132332 [Click to Download]

FY 20002012 4603 [Click to Download]

So in this piece, Citron publishes an update of the Maude database for 2013. There are some

noteworthy observations here:
http://www.cnbc.com/id/100564517http://www.cnbc.com/id/100564517http://www.cnbc.com/id/100564517http://www.citronresearch.com/wp-content/uploads/2013/10/MaudData-01-to-08-2013.xlsxhttp://www.citronresearch.com/wp-content/uploads/2013/10/MaudData-01-to-08-2013.xlsxhttp://www.citronresearch.com/wp-content/uploads/2013/10/MaudData-01-to-08-2013.xlsxhttp://www.citronresearch.com/wp-content/uploads/2013/01/MAUDDATA.xlsxhttp://www.citronresearch.com/wp-content/uploads/2013/01/MAUDDATA.xlsxhttp://www.citronresearch.com/wp-content/uploads/2013/01/MAUDDATA.xlsxhttp://www.citronresearch.com/wp-content/uploads/2013/01/MAUDDATA.xlsxhttp://www.citronresearch.com/wp-content/uploads/2013/10/MaudData-01-to-08-2013.xlsxhttp://www.cnbc.com/id/100564517


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We observe a huge increase in the number of MAUDE reports as 2013 begins2,008 filingsa

rate of over 400 a month, during the first five months of 2013 alone. This rate is more than five

timeshigher than any prior period since the da Vinci was introduced. Then notice a

precipitous falloff to just 50 reports in Julywith no explanation.

Meanwhile, surprisingly, the number of Injury or Death type events skyrockets in August to

105more than triple the rate of any prior month. This suggests drastic policy and procedure

changes at Intuitive. While its motives remain unclear, the inconsistency raises obvious doubts.

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Massive Increase in MAUDE Reports Submitted in 2013

Massive Increase in MAUDE Death and Injury Reports


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Augusts 105 injury and death reportsare apparently due to a mass posting of 73Injury or Death events which are annotated As part of a legal mediation effort in the

companys inserted notes. Altogether there are 40 such legal complaint reports, all Injury

or Death event types, filed in the last four months, all of which show a time lag between

event date and date reported of one to four years or more.

Why has the FDA not opened a formal investigation into this? This is real and dangerous.

A reasonable investor would anticipate that reams of litigation disclosure will be made public in

the companys 10-Q filing due this month. There are so many disturbing questions opened up

by this dataset that Citrons commentary only scratches the surface.

This Excel format allows analysts, decision makers and individual investors alike to inspect this

data, pose their own questions and seek their own answers.

Here are a few pointers for viewing the MAUDE data in Excel format:

Filters can be set on each column for any data value or expression (for example, event

types of Death, Injury or Malfunction.

Keywords can be searched across all records, or set as filters in any column.

The red highlighted columns are the textual narratives, which contain the most depth of

detail. They can be read most conveniently by dragging the lower edge of the cell

contents window vertically so several lines of text are visible, or by formatting free text

columns E and F with word wrap turned on, and widening those columns.

The data can also be imported into your database of choice.

Column J, the MDR Report Key, is a hyperlink to the entire report record online at the

FDA site.

We think that based on the sample, the 245 reported casesrepresent a small fraction of the true events out there, The number

of reported cases seems very low, given the discussion of theseevents in the surgical community.

-- Dr. Martin Makaryassociate professor of surgery

Johns Hopkins University School of MedicineBaltimore, Maryland

http://www.medscape.com/viewarticle/810490
http://www.medscape.com/viewarticle/810490http://www.medscape.com/viewarticle/810490http://www.medscape.com/viewarticle/810490


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Here are just a few of the questions that stand out to us:

How can so many bowel punctures and burns be occurring in highly routine surgeries

such as hysterectomy and prostatectomy?

Why does the company insiston appending every injury and death record with one ofits dont blame usannotations, such as no machine failure, no system errors,

system functioned within specification or no anomalies detected during the surgery,

etc. ?

Is death a reasonable risk factor from a routine cholecystectomy (gall bladder removal),

one of the simplest and most routine surgical procedures?

Why are patients with serious septic aftereffects of da Vinci surgery discharged from the

hospital, only to be readmitted to the emergency room in life threatening conditions?

Before the analysts jump to their feet with their blindfolds on and your wallets open, they

should ask themselves: did any of these events ever happen to one of their loved ones? It is

the opinion of Citron that the only reason there is not a national outcry is because the da

Vinci robot has yet to kill or injure the right personlike the next of kin of a congress

member or a celebrity.

Questions Investors Should Demand Answers to:

What is the actual change in the legal liability landscape due to all these new suits being filed?What will be the impacts on Intuitives client hospitals their purchasing choices and their

professional practice oversight?

Why are so many of these reports backdateddisclosing just now the adverse events from

surgeries conducted years ago? How far back in time does the liability extend? How many such

cases are being spawned right now, on a track where the investing public wont find out about

them for years to come? How many reports are applicable to current surgeries? Is the

frequency of reporting Adverse Events increasing? Why?

There are between 55 and 60 cases of punctured, burned or lacerated bowel injuries logged

during 2013 alone. Some of these were caught and repaired by the surgeon during the

procedure, but in many other cases, the patient was sent home, returning to the hospital later

with serious or life threatening abdominal infections. Considering that the majority of these

cases are relatively simple hysterectomies or prostatectomies, these cases are extremely

disturbing. There should be no such risk with these types of surgeries.


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(Because the MAUDE reporting system is voluntary, it cannot ever be used as a quantitative

measure of outcomes. See the FDA site for its cautionary comments about use of the MAUDE

data.)

The truth is now coming outone local paper at a time.

The commercial success of da Vinci can be attributed to patients demanding robotic surgery

having been the targets of intensive direct marketing and PR. Over the past ten years local

newspapers have touted the local hospital who just purchased their robotic surgery machine.

But now the tides have begun to turn. Here is a recent article that is reflective of many around

the country which now discuss the dangers that have been expressed by Citron et al

The Bottom Line

Intuitives entire business is driven by just two benchmarks: the number of new surgical

suites sold, and the number of procedures performed using installed da Vincis.

Last quarter clearly demonstrated new surgical suite sales far below guidance.

The company procedure counts are vulnerable to declining use for prostatectomy and

hysterectomy. Management claims they are going to shore up the losses in these

mainline procedures with gall bladder surgeries (cholectystectomy), while touting a

new da Vinci model that runs all the robot arms through a single incision port. But gall

bladder removal surgery is an easy, hour-or-less procedure performed by a surgeon

skilled in handheld laparoscopic technique So does using da Vinci genuinely add

value, or is it just a way of amortizing the costs of underutilized and oversupplied da

Vincis, while shoring up the companys income statements?

Note the repeating pattern: the company touts medical breakthroughs that will

purportedly drive its growth, but its business strategy is to target high-volume routine

surgeries for which its technology represents a solution looking for a problem. Again,

theres no established medical benefit here, other than fewer and smaller incisions. For

a few single women, smaller abdominal scar marks is a plus. But gall bladder surgery is

extremely common, and widely recognized as one of the simplest surgeries to

performso it should be done by robot, because . ?

Vanderbilt's Dr. Joseph Smith reported that it took him 150surgeries before he got

results as good as when he performed open prostatectomies. He said it took him

250surgeries before he was comfortable and confident using the machine.

http://www.ocregister.com/articles/robot-527186-ahlering-company.html
http://en.wikipedia.org/wiki/Cholecystectomyhttp://en.wikipedia.org/wiki/Cholecystectomyhttp://en.wikipedia.org/wiki/Cholecystectomyhttp://www.ocregister.com/articles/robot-527186-ahlering-company.htmlhttp://www.ocregister.com/articles/robot-527186-ahlering-company.htmlhttp://www.ocregister.com/articles/robot-527186-ahlering-company.htmlhttp://en.wikipedia.org/wiki/Cholecystectomy


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Analysts at industry conferences clamor to ask the company: When will the bad news

stop? completely missing the point that the real battleground is not fighting for

headlines, but rather determined by the actual clinical outcomes. That drives the

business model of the company, and ultimately the financials. Can Intuitive really

maintain double-digit growth through the decade, as forecast by nearly every analyst?

The amazing thing about the analyst coverage of Intuitive is that it seems utterly

inconceivable to anyone on Wall Streetthat this company could stop growing entirely

for the foreseeable future. A few analysts have shaved a few points off the growth

trajectory. But Citron asks a deeper question: are the best days of Intuitive Surgical

behind it, or ahead of it?

Citron suggests that the market for da Vinci devices and procedures is already at or near

saturation, and the safety concerns and negative news flow need only take the top off already

weakening utilization rates, to stifle the demand for new units.

What about this quarter?

A recent survey by SunTrust of Intuitives sales pipeline wasspun as positive, but in Citrons

opinion it is could hardly be worse. Intuitivespenetration among addressable U.S.hospitals (over 100 beds) already exceeds 54%, so the number of cancellations plus long delays

in its pipeline outpacing planning-to-buys has to be of tremendous concern.

20.3%

1.4%

1.4%

1.4%

18.9%

2.7%

8.1%

45.9%

Planning to buy --15

Delay 3 - 6 months -- 1




Delay > 24 months -- 2

Cancelled -- 6

Not Planning to Buy -- 34

Recent Survey of Intuitives Potential Buyers


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It is Citrons opinion that a delay of greater than 12 months qualifies as a virtual cancellation.

The survey has 4 separate choices for 0-3, 3-6, 6-9, and 9-12 month delays, all of which were

bypassed by 16 out of 19 respondents.

So either this quarter clearly demonstrates declining revenue growth at Intuitive, or the

company has found a creative way to make its numbers at the expense of patients globally.

Further Research

In the near future Citron will put out further research clearly demonstrating the absence of an

acceptable return on investmentfor hospitals considering ponying up for more da Vinci units.

We did not want to comingle that research with this current body of work because of the

importance of this message. We believe that the many robotic surgery committees at hospitals

worldwide are already performing this analysis -- and we will confirm their conclusions.

Conclusion

Again, Citron is notsaying that, for some patient conditions, the da Vinci is not an effective tool

in the hands of a skilled surgeon highlyexperienced in its use. But the choice to use it in a given

surgery should be a matter of the doctors judgment, after impartially weighing alloptions,

armed with the best clinical science with regards to standards of care, in light of the specifics of

the patients condition. It should neverbe influenced by a salesperson who has access to

patient charts. And it ispast timeto stop one-sided and misleading marketing to patients,without full disclosure of the risks.

Note to Intuitive management: It is about time that Intuitive takes a step back from its

aggressive sales and share repurchase practices. Use your money instead to establish proper

training centers for surgeons.

Additional reading -- We are sure than many of you have already read:

Thestatement by the American Congress of Obstetricians and Gynecologists(ACOG)

that robot-assisted Hysterectomy (Intuitives #1 highest-volume procedure) is not

clinically superior to handheld laparoscopic surgery for routine hysterectomy with

higher costs and longer operating times, and should not be the standard of care.

Thestatement by the National Cancer Institute of the National Institutes of Healththat

radical prostatectomy, (Intuitives #2 highest-volume procedure) is not the standard of

care for the vast majority of prostate cancers. Conservative care (watching, without

aggressive treatment) has better overall outcomes than surgery for all but the most

aggressive cancer sub-types.
http://www.acog.org/About_ACOG/News_Room/News_Releases/2013/Statement_on_Robotic_Surgeryhttp://www.acog.org/About_ACOG/News_Room/News_Releases/2013/Statement_on_Robotic_Surgeryhttp://www.acog.org/About_ACOG/News_Room/News_Releases/2013/Statement_on_Robotic_Surgeryhttp://www.cancer.gov/cancertopics/pdq/treatment/prostate/HealthProfessional/page3http://www.cancer.gov/cancertopics/pdq/treatment/prostate/HealthProfessional/page3http://www.cancer.gov/cancertopics/pdq/treatment/prostate/HealthProfessional/page3http://www.cancer.gov/cancertopics/pdq/treatment/prostate/HealthProfessional/page3http://www.acog.org/About_ACOG/News_Room/News_Releases/2013/Statement_on_Robotic_Surgery


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AnFDA Warning Letterabout failure to furnish material information about possible

product safety defects and misbranded devices.

The many recent articles bring to the publics attentionincreased awarenessabout the

undisclosed risksof robotic surgery; tremendous increase in the number of adverse

events with injuries and deaths as reported in the only publicly available source of suchinformation.

Cautious Investing to All
http://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2013/ucm363260.htmhttp://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2013/ucm363260.htmhttp://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2013/ucm363260.htmhttp://www.ocregister.com/articles/robot-527186-ahlering-company.htmlhttp://www.ocregister.com/articles/robot-527186-ahlering-company.htmlhttp://www.ocregister.com/articles/robot-527186-ahlering-company.htmlhttp://www.medscape.com/viewarticle/810490http://www.medscape.com/viewarticle/810490http://www.medscape.com/viewarticle/810490http://www.ocregister.com/articles/robot-527186-ahlering-company.htmlhttp://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2013/ucm363260.htm

intuitive surgical oct 2013 maude update final

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